Jun 23, 2023Investments

Capital Gains Tax on Property: Tax Calculation Steps & Formula

by Godrej Properties Limited

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The profit earned from selling a property in India is called a capital gain, which attracts capital gains tax. Short-term capital gains tax is levied for property sold within two years from purchase. Similarly, long-term capital gains tax is levied for property sales anytime after two years. Below we discuss how to calculate capital gain on the sale of property.
 

Latest News on Capital Gains Tax (2023)

The Union budget 2023 introduced a limit of Rs. 10 crore for long-term capital gains tax deductions, effective April 1, 2023. This limit applies to reinvestment in residential properties under Sections 54 and 54F of the Income Tax Act. These sections allow for claiming long-term capital gains on property sales and reinvestment in residential property.
 

The Financial Bill 2023, approved by the Lok Sabha on March 24, 2023, brought significant changes to capital gains from debt mutual funds. From April 1, 2023, there will be no indexation benefit in long-term capital gains calculations on debt mutual funds with less than 35% equity exposure. Such gains will be taxed according to the individual's income tax slab. This change also affects bank fixed deposits and other similar investments.
 

Equity shares and mutual funds remain taxed at 10% without indexation benefit if long-term capital gains exceed Rs. 1 lakh in a financial year.

 

Capital Gains Tax

 

What is Capital Gains Tax In India?

Capital gain refers to the profit earned from selling a capital asset, including properties, stocks, mutual funds, etc. This profit is considered taxable income, subject to specific rules and rates in India.
 

Difference Between Short-Term and Long-Term Capital Gains

Short-term capital gains apply to assets held for 36 months or less (24 months for immobile properties). Long-term capital gains apply to assets held for more than 36 months (24 months for immobile properties). Different tax rates and calculations apply to these categories.
 

Important Formulas

The formula for Calculation of Short-Term Capital Gains

Short-term capital gains are calculated using this formula: 
 

Short Term Capital Gain = Final Sale Price - (Cost of Acquisition + Home Improvement Cost + Cost of Transfer).
 

The formula for the Calculation of Long-Term Capital Gains

Long-term capital gains are calculated using this formula: 
 

Long-term capital gain = Final Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer).
 

These calculations consider factors like the Cost Inflation Index (CII) and the duration of asset ownership to account for inflation and determine tax liability.

Step to Calculate Capital Gains Tax on Property

Use a capital gain tax calculator, or alternatively, follow the steps below to calculate capital gains tax:
 

  1. Calculate the cost of acquisition or value of the property when the seller initially acquired it. This includes property transfer costs such as registration charges, stamp duty, or brokerage fees.
  2. Determine the cost of improvement or expenses incurred for improving the property.
  3. Determine the final sale price of the property or consideration the seller received.
  4. Derive CII by dividing the CII of the year of sale by the CII of the year of purchase.
  5. Calculate the indexed acquisition cost by applying the Cost Inflation Index (CII) to account for inflation during the holding period.
  6. Calculate the indexed cost of the improvement by multiplying the cost of the improvement by the derived CII.
  7. Calculation of capital gains is done by subtracting the indexed cost of acquisition and the indexed cost of improvement from the total value consideration.
  8. Identify if the property was held for a short or long term to determine which tax is applicable.
  9. Calculate the tax liability by multiplying the capital gains by the applicable tax rate.

Formula to Calculate Capital Gains Tax on Property with Indexation

Online capital gain calculators with indexation are available. However, you can also do so manually using the formulas. Let’s look at an example of how to calculate capital gain on property:
 

Mr. Sharma purchased a flat for Rs. 20 Lakh in 2013 and spent around Rs. 3 Lakh to improve or renovate the flat. Ten years later, in February 2023, he decided to sell it for Rs. 40 Lakh. 
 

  • CII= Index for FY 2022-23/Index for FY 2013-2014 = 348/220 = 1.58
  • Thus, the indexed cost of purchase = CII x Purchase Price = 1.58 x 20,00,000 = Rs 31,63,636
  • Additionally, indexed cost of improvement = CII x Cost of improvement = 1.58 x 300,000 = Rs 474,545
  • Long-term capital gain = Selling Price - Indexed cost of purchase and improvement = 40,00,000 - 31,63,636 - 474,545 = Rs. 316,819
  • Finally, tax on capital gain = 20% of 316,819 = Rs 72,363

 

Frequently asked questions

1. What is the tax rate for capital gains from property sales?

Ans: Capital gains on property sales are subject to 20% tax plus a 3% cess.
 

2. Is capital gains tax applicable to inherited property?

Ans: Selling an inherited property incurs capital gains tax, calculated based on the previous owner's indexed cost.

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